Suncor targeted by Canada Revenue Agency

Suncor Energy stock falls, company targeted by Canada Revenue Agency

Shares of Suncor Energy Inc. took a hit on Wednesday after the company’s fourth quarter earnings missed analyst estimates and it took a $1.5-billion charge related to the Voyageur upgrader project.

The selling pressure is also likely due to Suncor’s announcement that it recently received a letter from the Canada Revenue Agency relating to the income tax treatment of losses incurred in 2007 on the settlement of old Petro-Canada derivatives contracts.

“Essentially, the CRA is challenging tax losses carried forward associated with the loss realized on the settlement of the old hedges that were put in place and settled by Petro-Canada,” Canaccord Genuity analyst Phil Skolnick explained.

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While Suncor disagrees with the CRA’s position and is confident it will be able to defend its original filing, Mr. Skolnick suggested that the CRA may move to issue a notice of reassessment to increase the amount payable by approximately $1.2-billion, or 78¢ per share.

Despite Suncor’s objection, the analyst said it would have to make a minimum payment of 50% of the amount payable under the notice of reassessment. That is estimated at $600-million and would remain in place under the dispute is settled.

“Suncor believes this could be resolved soon enough to allow for clarity on dividend upside potential in late April; however, we believe near term it will be an overhang on the stock,” Mr. Skolnick said in a research note.

“Nevertheless, it is very likely the company has received sound advice from various legal and tax professionals to allow it to state that it believes it won’t see any increased taxes. As such, this could create a good buying opportunity,” he added.

The analyst also emphasized the implications this has on the broader Canadian energy industry as the CRA looks “anywhere and everywhere for tax grabs.”

Athabasca Oil Corp., for example, is already being reviewed for the capital treatment of its 2010 joint venture with PetroChina and capital dividend.